Tyson Foods, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended September 29, 2018 (52 weeks). This is an annual filing, not a standalone fourth-quarter report. Tyson is a protein and food producer operating Beef, Pork, Chicken and Prepared Foods segments.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Sales | $40.052 billion | $38.260 billion |
| Gross profit / margin | $5.126 billion / 12.8% | $5.083 billion / 13.3% |
| Operating income / margin | $3.055 billion / 7.6% | $2.931 billion / 7.7% |
| Net income attributable to Tyson | $3.024 billion | $1.774 billion |
| Diluted EPS attributable to Tyson | $8.19 | $4.79 |
| Operating cash flow | $2.963 billion | $2.599 billion |
| Capital expenditures | $1.200 billion | $1.069 billion |
| Gross debt / net debt | $9.873 billion / $9.602 billion | $10.203 billion / $9.882 billion |
| Cash and cash equivalents | $270 million | $318 million |
Sales rose 4.7%, reflecting higher volume (2.5%) and average prices (2.1%). Operating income increased 4.2%, while gross and operating margins edged down. The reported net income increase was substantially driven by a $1.004 billion tax benefit from remeasurement of deferred tax liabilities after U.S. tax reform; FY2018’s effective tax rate was negative 10.3%, versus 32.3% in FY2017. Net income and EPS growth therefore are not a direct measure of comparable operating improvement.
Operating cash flow increased by $364 million. Liquidity was $1.416 billion, including $270 million cash and available revolving capacity net of commercial paper. Current debt was $1.911 billion; the current ratio fell to 1.13 from 1.55. Net debt/EBITDA improved to 2.4x from 2.7x. The company reported compliance with debt covenants. EBITDA of $4.021 billion and leverage ratios are non-GAAP measures and should be considered alongside GAAP results.
Segment performance and changes
- Beef: Sales of $15.473 billion and operating income of $1.013 billion, up from $877 million. Margin improved to 6.5% from 5.9%, supported by stronger demand, exports and cattle availability.
- Pork: Sales of $4.879 billion and operating income of $361 million, down from $645 million. Margin fell to 7.4% from 12.3% amid excess domestic supply, compressed margins, and higher labor and freight costs.
- Chicken: Sales of $12.044 billion and operating income of $866 million, down from $1.053 billion. Margin fell to 7.2% from 9.2%; costs included higher feed, labor, freight and growout expenses, as well as derivative losses.
- Prepared Foods: Sales of $8.668 billion and operating income of $868 million, up from $462 million. Margin rose to 10.0% from 5.9%, reflecting improved mix and acquired businesses, partly offset by costs and divestiture-related impairments.
Tyson acquired Original Philly, Tecumseh and American Proteins for approximately $1.5 billion net of cash acquired. It also sold four non-protein businesses for net proceeds of $805 million, sharpening its focus on protein brands. Acquisitions and divestitures affect year-over-year comparability; the filing attributes $1.060 billion of sales to the inclusion of AdvancePierre results through the first anniversary of its acquisition.
Outlook, commentary and significant risks
- Management expected FY2019 capital spending of approximately $1.5 billion, net interest expense of approximately $350 million, and an effective tax rate of approximately 23.5%.
- Tyson expected FY2019 annual dividends of $1.50 per Class A share and $1.35 per Class B share, a 25% increase from FY2018 rates, and anticipated further annual dividend increases of approximately $0.10 per share.
- The proposed $2.16 billion cash acquisition of Keystone Foods was expected to close in the first quarter or early second quarter of FY2019, subject to customary conditions and regulatory approvals. Management expected permanent financing to include senior notes, term loans, commercial paper and cash.
- Management cited uncertainty from trade policies and tariffs affecting domestic and export prices, particularly chicken and pork, and higher freight and labor costs across segments. Tyson intended to seek cost recovery through pricing.
- Key risks include commodity and livestock price volatility, disease outbreaks, food safety and recalls, export restrictions and tariffs, labor availability, customer concentration, acquisition integration, debt and interest rates, and implementation of its multi-year restructuring and ERP programs. Walmart represented 17.3% of FY2018 sales.
- Goodwill and indefinite-lived intangible assets totaled $13.8 billion, approximately 47% of total assets, exposing reported value to estimates of future cash flows and discount rates.
- Material proceedings include broiler-chicken antitrust litigation, a Florida investigation related to a chicken-price index, and pork-price-fixing litigation. The filing states outcomes are uncertain; investors should review the contingency disclosures for updates and recorded accruals.
Unusual items include the $1.004 billion tax-remeasurement benefit; $109 million in one-time frontline employee cash bonuses; $59 million in restructuring charges; and $68 million of impairment charges net of realized gains associated with divested non-protein businesses. The Financial Fitness Program was estimated to involve $253 million of total pretax charges, of which $209 million had been recognized by year-end.
Most important facts for investors to verify
- How much of FY2018 earnings growth reflects recurring operating performance versus the one-time tax benefit, and how results compare after adjusting for acquisitions, divestitures and other unusual items.
- Whether Pork and Chicken margins recover from oversupply, feed, labor, freight and tariff pressures, and whether Beef and Prepared Foods sustain their stronger performance.
- Whether Keystone closed on the expected timetable and whether its financing, integration costs and projected benefits align with management’s expectations.
- How FY2019 operating cash flow, capital spending, current-debt repayment and leverage develop, particularly as planned capital expenditures rise and liquidity is limited relative to obligations.
- Developments in significant litigation and contingencies, and any changes in goodwill/intangible-asset impairment assumptions, customer concentration or trade access.